2009 State of the Market Report

External Transactions

differences were more volatile during the first half of 2009. IESO premiums of approximately $5 per MWh prevailed during the first two months of the year, while Midwest ISO premiums averaged $6.25 per MWh from March to July. The dispersion of prices shows the schedules over this interface are relatively slow to respond to price differences.

Interpreting these results is complicated by the fact that the IESO does not have a nodal market, so the IESO price may not fully reflect the true value of power imported from the Midwest ISO. Internal constraints in the IESO can cause such imports to be more or less desirable than the price would indicate. Given the current market design in the IESO, there are limited options for improving the external transactions over this interface.

However, to achieve better price convergence with PJM, we continue to recommend that the RTOs consider expanding the JOA to optimize the net interchange between the two areas. The BRM initiatives contemplate a number of possible enhancements to coordination of inter-RTO transaction scheduling. One of these is to move to 15-minute scheduling as a first step. Another is an enhancement that would allow market participants to submit a single transaction bid corresponding to the spread of real-time prices between the RTOs that would be evaluated by the scheduling ISOs in a coordinated intra-hour scheduling process. We strongly support this proposal because it would improve the efficiency of the interchange between control areas, which would lower overall production costs across the four ISOs. This change would allow the markets to be more fully arbitraged and likely achieve the vast majority of potential savings associated with jointly dispatching the generation in the two regions.

D.

Resource Adequacy and External Transactions

This section shows that the Midwest ISO relies on a high level of net imports to meet its energy needs. Therefore, it is reasonable to expect that it will rely on comparable levels of external capacity to meet its resource adequacy needs under Module E. However, our review of the Module E requirements indicates potential problems both with participants’ ability to import capacity from external areas and to export capacity to PJM. Capacity prices will only be efficiently determined if participants are able to freely import and export capacity to arbitrage capacity price differences between markets to the extent that the physical transmission capability